| 1. Formation |
|
| Interest in tangible real property |
Interest in intangible personal property |
Undivided Fractional Interest (UFI)
or
Tenancy In Common (TIC) - ownership of a physically undivided portion of the entire realty parcel |
Interest in a business entity (i.e. a
partnership or LLC) which is the titleholder to the realty |
| TIC of Legal Title |
TIC of Equitable Title (Note: This is
a conservative interpretation of the Revenue Procedure)
1) Land contract
2) Financing lease |
| 35 or less TIC co-owners |
More than 35 TIC co-owners |
| IRC 761(a) election from the beginning |
IRC 761(a) election by TIC co-owners whom had held their interests immediately prior through an entity which then distributes the realty ("drop and swap") |
| A sponsor may package TIC interests in return for the payment of reasonable compensation based on the FMV of the TIC interests. |
A sponsor being compensated based on the income or profit of any TIC co-owner |
| The sponsor of the TIC interests or the lessee can be a TIC co-owner for up to six months |
Any sponsor or lessee whom is a co-owner for more than six months |
| When the TIC co-owners - lessors wish to have a "kicker" in the FMV lease for the underlying realty, the rent can be based on a fixed percentage of gross receipts of a tenant |
The
kicker for the underlying realty is based on the net income, cash flow or shared equity of a tenant |
TIC interest in
a single property. However, multiple properties will be considered a "single property" if:
1) Multiple parcels are rented to one lessee reflected in one lease with blanket debt being on all of the realty; each co-owner must have an identical percentage of ownership on each of the parcels
2) Contiguous parcels
3) Noncontiguous parcels but related in use (e.g. office building and a nearby garage) |
TIC interest in multiple properties not considered a single property such as an interest in a package of several unrelated properties. |
| 2. Allocation Issues |
|
Pro-rata sharing (in proportion to the co-owner's individual percentage
in the underlying title)
1) Profits, expenses
2) Cash distributions
3) Indebtedness |
Nonpro-rata sharing of:
1) Profit, expenses
2) Cash distribution
3) Indebtedness
|
| 3. Management and Operations |
|
| TIC
Co-ownership Agreement which must provide: |
|
1) Unanimous and contemporaneous approval required for such "significant decisions" as:
i) Sale, lease (including renewals), indebtedness/refinancing
ii) Hiring of any manager
Majority vote OK for all other actions |
a. Majority vote for significant decisions |
Agreements for the managing of the realty
- Manager can be any co-owner or the sponsor but not a lessee
- Management fees must not be based on the amount of income or profit received by any TIC co-owner
- A common bank account is allowed (with periodic accounting statements for the co-owners being prepared) provided that any net revenues are distributed within three months of receipt
- The manager may negotiate on behalf of the co-owners subject to the subsequent approval of the co-owners pursuant to the unanimous/ majority voting rules
- Must be a renewable no less frequently than annually
|
Longer term management agreements for the realty (i.e. exceeding a year) or those with impermissible terms |
| Specific Power of Attorney (e.g. allowing a manager to execute a certain document) |
Global Power of Attorney |
| Co-owners are able to perform services with respect to the realty that are normally undertaken in the maintenance and repair of rental property |
Co-owners performing business activities with respect to the realty |
| "Intra property loan" in the event of a cash flow deficiency which shortfall is advanced by a co-owner or the manager (to another) are allowed if the debt is recourse and repaid within 31 days. This provision also precludes any co- owner, sponsor, manager or lessee being the lender with respect to the debt that encumbers the realty |
"Intra property advances" without the "good" restrictions |
| 4. Exit Strategies |
|
The following restrictions can be recorded on title:
a. A Right of First Offer (ROFO) to other co-owners before the disposing co-owner sells to an outsider
b. A Right of First Refusal (ROFR) requiring the co-owner, before pursuing an action of partition, to offer the property to the other co-owners, sponsor, or lessee at the current FMV
|
Restrictions on the right to transfer, encumber, or partition a co-owner's interest (though a lender may restrict if commercially reasonable) |
| A co-owner may acquire a call option with respect to another co-owner's interest provided the
price is based on valuing the property as a whole without any discounting for minority and/or control factors |
A put option requiring the purchase of the co-owner's property interest by the
sponsor another co-owner or the lessee |
| When the TIC realty is sold, all property debt is satisfied and the net proceeds are distributed |
Real property sale with the purchaser assuming the mortgage
sale proceeds by the group of co-owners |
To Be Considered
- An entity such as a Solely Owned Limited Liability Company (SOLLC) as an owner of a TIC interest
- Master lease for multi-tenant property providing for a sublessor (such as the TIC sponsor) to pay a net lease amount to the co-owners in return for subleasing the property
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